Monday, January 14, 2013

The Ability to Fade the Obvious

I am a losing win bettor at horse racing, just like everyone. I am tearing up almost 8 in 10 tickets and throwing them on the ground. Virtual scoopers love me. Only on two of ten bets I can smile and say, "I won".

It doesn't mean I lose at betting in the win pools at the end of the year, but when you lose that many bets it can feel like it.

In behavioral economics, "Prospect Theory" explains the fact that we as human beings value wins and losses differently. We derive more pain from losing, than joy from winning, as illustrated in this graph:

You can see this in gambling by simply having a chat at the simo-center or popping on twitter or a chat board. If a horse is hyped, you are told you have to be crazy to bet against them. If a football team is a favorite and scores on their first series you have to be nuts to fade it. Not only will you probably look stupid, you will lose your bet. All those people who are telling you you're stupid add to your grief.

In reality, those are the best times to do exactly the opposite of what the masses are telling you to, because the odds will be in your favor. The odds matter, not being right or wrong.

The thing that strikes me about the Prospect Theory model when using it for horse racing is that if we think about it, the above graph is the thing that's wrong. Whenever I speak with a player who remembers a big score they almost always faded a chalk to get it. It's where you generally make those huge, memorable wins: Throw out the Green Monkey, fade that Derby hype horse, bet against a bridge-jumper.

We incur pain because we may lose those bets, but over time we remember them adding to our utility. That graph should actually be a lot closer to symmetrical.

As horse racing bettors we need to always fight those demons because they are always nattering at you. But to beat a 20% takeout we have to, or we end up losing our shirt. And we have to always remember that big picture: In the end losing your shirt feels a whole lot worse than being wrong.




1 comment:

Alpha Link said...

I didn't know that it had a name. Years ago, a maniacal gambler in a moment of clarity and insight observed "losing feels worse than winning feels good..."
I concur!